《金融市场与机构 Jeff Madura》ch05.pptVIP

5 Monetary Theory and Policy Chapter Objectives Learn the well-known theories of monetary policy Review the tradeoffs involved in monetary policy Learn how analysts monitor and forecast Fed’s monetary policy Monetary Policies How does money affect the real economy? How does varying money supply growth impact spending? How does monetary policy in the financial sector impact real economic sector investment and spending? Keynesian Theory Developed by John Maynard Keynes and his students Initially attempted to explain inadequacy of monetary policy during Great Depression Effectiveness of monetary policy depends upon the sensitivity (elasticity) of economy to changes in interest rates Keynesian Theory, cont. Advocates fiscal policy Focused on government deficit/surplus spending to impact economic activity Monetary policy transmitted slowly via bank credit policy and interest rates A proactive economic policy Exhibit 5.3 Monetary Theories Quantity theory Based on equation of exchange MV = PGQ M = amount of money in the economy V = velocity, average number of times each dollar changes hands during the year PG = weighted average price level of goods and services in the economy Q = quantity of goods and services sold Monetary Theories Quantity theory’s assumptions PGQ is the total value of goods and services produced Assume V constant or predictable—changing M impacts total spending M should grow at rate of output capacity, Q Faster M growth increases PG or inflation Monetary Theories Monetarists Velocity is affected by Income levels Frequency income is received Use of credit cards Inflationary expectations Velocity changes found to be predictable and not related to fluctuations in money supply Monetarist vs. Keynesian Theories Monetarist Let economic problems resolve themselves Low growth reduces borrowing and lowers interest rates Problem: It takes time Keynesian Need to take action to lower interest rates High money growth to fix a recession by lowering rates Prob